SLIDE 8 S U M M A R Y O F A S S U M P T I O N S : R E T U R N S
8 Asset Class Index Proxy Ten Year Return Forecast Standard Deviation Forecast Sharpe Ratio Forecast Ten Year Historical Sharpe Ratio Geometric Arithmetic
Equities
US Large S&P 500
5.9 6.9 14.6 0.23 0.47
US Small Russell 2000
5.1 6.9 19.7 0.13 0.46
International Developed MSCI EAFE
8.3 9.8 18.2 0.32 0.43
International Small MSCI EAFE Small Cap
8.5 10.3 20.0 0.30 0.52
Emerging Markets MSCI EM
10.1 12.6 24.0 0.32 0.55
Private Equity Cambridge Private Equity
8.1 10.5 23.6 0.24 0.96
Fixed Income
Cash 30 Day T‐Bills
2.5 2.5 0.5
US TIPS Barclays US TIPS 5 ‐ 10
3.1 3.3 6.7 0.09 0.56
US Treasury Barclays Treasury 7 ‐ 10 year
3.0 3.3 6.9 0.08 0.61
Global Sovereign ex US Barclays Global Treasury ex US
2.2 2.5 8.1 ‐0.03 0.42
Core Fixed Income Barclays US Aggregate Bond
4.1 4.2 3.6 0.45 0.92
Investment Grade Corp. Credit Barclays US Credit
4.0 4.2 5.8 0.26 0.68
High Yield Corp. Credit Barclays High Yield
4.4 4.9 10.5 0.18 0.71
Bank Loans S&P/LSTA
3.5 3.9 8.7 0.12 0.46
Global Credit Barclays Global Credit
3.1 3.4 7.6 0.08 0.60
Emerging Markets Debt (Hard) JPM EMBI Global Diversified
5.8 6.2 9.0 0.37 0.77
Emerging Markets Debt (Local) JPM GBI EM Global Diversified
6.6 7.3 12.6 0.33 0.61
Private Credit High Yield + 200 bps
6.4 6.9 10.5 0.37 ‐
Other
Commodities S&P GSCI
4.9 6.4 18.2 0.14 0.11
1Hedge Funds
HFRI Fund of Funds
6.3 6.7 9.2 0.41 0.35
Core Real Estate NCREIF Property
6.5 7.3 13.4 0.30 0.99
REITs Wilshire REIT
6.5 9.7 26.8 0.15 0.39
Inflation
2.4
1 All returns are gross of fee with the exception of hedge funds.
This year we have included both geometric and arithmetic return forecasts. It is important that users of this information understand how we derived it. Our forecast process involves the use of a wide range of data inputs (of a variety of different types) to create geometric return forecasts for individual asset classes – this is the process described at length in this document. We use an industry standard formula to convert these to arithmetic return forecasts, and provide both for client use. Investors wishing to produce expected geometric return forecasts for their portfolios should use the arithmetic return forecasts provided here as inputs into that calculation, rather than the single‐ asset‐class geometric return forecasts. This is the industry standard approach, but requires a complex explanation only a heavy quant could love, so we have chosen not to provide further details in this document – we will happily provide those details to any readers of this who are interested. More broadly, it is important that the user of these forecasts remembers that return forecasts (whoever provides them) are there to provide a guide to the likely future, no more. While we believe that the approach described in this document is an appropriate one to use for those purposes, and that the forecasts resulting from that approach are meaningful and fit for the uses to which they will be put, users of any such forecasts should always bear in mind the fact that the single most difficult thing to predict is the future, and approach that exercise with appropriate skepticism.
